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Friday, December 09, 2011

The summit to end all summits

At least that was how it was being seen beforehand. Unfortunately, in the aftermath it seems to have fallen short of expectations (although admittedly the dust is yet to fully settle). Nevertheless, it was an interesting summit, especially for the UK. Below we outline the key outcomes of the summit giving our assessment of the economic, political and legal impact which the decisions may have (read our full press release here).

1) Treaty change

Summary: Failed to agree to a treaty change involving all 27 member states. Eurozone members will push ahead with a new treaty for the 17, plus a possible 9 other EU states, pending consultation with national parliaments. Aim to incorporate the measures into the EU Treaties as soon as possible.

Open Europe’s take: The legal basis for the new intergovernmental treaty is still not clear. It will be very legally complex for the new group to use EU institutions to enforce the new treaty without the consent of the UK. As such, the negotiations are far from over, particularly since eurozone leaders are still keen to incorporate the measures into the Treaties and push further in the future in terms of integration.

Was Cameron right to use his veto? How might it impact on UK – EU relations in the future?

- Cameron had little choice but to exercise his veto given the importance of financial services to the UK economy and his need to balance domestic party concerns. His demands were not excessive, particularly given that other EU members have issued similar national demands during this crisis, e.g. Germany over Eurobonds and the ECB’s role, France over using the European Court of Justice (ECJ) to enforce fiscal sanctions and now Finland over the use of QMV in the ESM.

- There was never any discussion of the UK taking part in the new ‘fiscal compact’ but merely whether it would approve the treaty change or not. As such, the UK’s position has not changed within the EU itself. The political dynamics may have changed but whether this will turn out to be better or worse for the UK remains to be seen.

- There is still a huge legal mess to sort out. Whether the new treaty will be enforced by EU institutions or not remains unclear, as is the UK’s role in future proceedings, but it looks likely to be a massive legal stretch to use the existing EU institutions for this new treaty.

- There are valid concerns that Cameron received no clear safeguards while spending a lot of political capital. In order for this to be a sound investment, it needs to be followed up with a concerted push for a more flexible, adaptable and competitive EU in which the UK can feel at home. In the wake of the eurozone crisis, Europe will need a new grand political settlement, which can take years and in which the UK, like all other EU countries, will push their interests.

2) Fiscal compact

Summary: Commitment to balanced budgets, with an annual structural deficit limit of 0.5% enshrined in law and a clear, automatic correction mechanism for when this is broken. Legal enforcement judged by the European Court of Justice (ECJ). The Excessive Deficit Procedure will be strengthened; any country which breaks the 3% threshold will be subject to Commission sanctions unless a qualified majority of eurozone states oppose them. Examine new Commission rules on economic governance and increase surveillance.

Open Europe’s take: Only difference from the stability and growth pact is that qualified majority voting is reversed. Not a particularly credible or strong fiscal compact. There are significant concerns that if countries such as Germany and France struggle to meet the requirements, they will be watered down. Missing out on strong ECJ enforcement and European level automatic sanctions reduces the impact of these measures, unlikely to be enough to convince markets or the ECB that fiscal discipline will be maintained in the long term. Not clear what a national automatic mechanism for correcting budget deficits would be. This seems to be the start of a process, installing fiscal straight jackets on struggling eurozone countries if they wish to stay in the eurozone long term – not clear where their growth and competitiveness will come from.

3) European Stability Mechanism (ESM)

Summary: Move up entry into force to July 2012 or as soon as members representing 90% of capital commitments have ratified it. EFSF will run until mid-2013 as expected, although deciding how the two will run at the same time (given current restrictions in the ESM treaty) will be delayed until March 2012. ESM wording on private sector involvement in future bailouts will be watered down, highlighting that Greece is “unique and exceptional”. An emergency procedure will be added to ESM voting rules, which states that 85% QMV threshold can be used to make decisions if the Commission and the ECB believe the financial and economic sustainability of the euro is threatened.

Open Europe’s take: Moving up the ESM is broadly positive from a market perspective, although the key issues about its implementation have been delayed. One concern is that the sped up timeline for paying in capital resulting from this move will increase pressure on the funding needs for eurozone states. Removing private sector involvement may calm markets in the short term but could be a mistake in the long term. Takes us back to where we were with EFSF bailouts, simply recycling debt around the eurozone with no clear goal for tackling solvency. Although the QMV rule has to be approved by the Finnish parliament, the “emergency procedure” seems misleading – in what instance would giving a bailout not be seen as an emergency?

4) IMF

Summary: Decide within 10 days whether to provide €200bn in bilateral loans to the IMF general resources fund, via national central banks.

Open Europe’s take: The IMF can apply more conditionality on lending, so it is preferable to the central banks doing it themselves. Still only offers a short term liquidity boost to countries, unless IMF is able to enforce broader economic restructuring which the eurozone looks set dead against. Raises questions over the independence of central banks, since they are giving up money to a general fund to be controlled by an institution with completely separate aims. May be opposed by the ECB and/or Germany depending on format. Even with this additional funding the IMF capacity for bailing out Italy and/or Spain still falls well short.